Mon, 24 May 2004

Let's get this out of the way fast: any minimum wage law is wicked,
and should be immediately abolished.

If that alone doesn't convince you, then let's get into details. A
minimum wage law says, in effect, that anybody whose labor is not
worth the minimum shall not be employed. Nobody would support a
minimum wage law if it were written that way. The Department of Labor
minimum
wage page says "The FLSA requires that most employees in the
United States be paid at least a minimum wage and overtime pay at time
and one-half the regular rate of pay after 40 hours in a workweek."

Minimum wage laws are supported by four sets of people:

Employers who do not want to have to compete with other employers
who have lower labor costs.

Employees who do not want to have to compete with other laborers
willing to accept lower wages.

Employees, typically represented by unions, who can claim that
they are providing skilled labor, and should be paid more than a
worker hired at the minimum wage.

Busybodies, who support "a living wage".

The classic example of an employer supporting the minimum wage is
the Northeast U.S. textile manufacturer. Textile mills were
originally built in America in the Northeast, where water power was
necessary and abundant. In time, water power became less important,
and textiles could be manufactured anywhere. Labor was cheap in the
South, and textile mills began to be built there, competing against
Northeast mills.

The Northeast mill owners did not want to have to compete with the
Southern mills. To raise everyone's costs to that of the Northeast,
they supported a minimum wage law. Rather than allow the South to
make textiles, and the Northeast workers move on to more profitable
activities, the Northeast textile manufacturers lobbied for a minimum
wage. In the end, they couldn't compete anyway, and most Northeast
textile mills have closed.

Employees want to be paid as much as they can, of course. They
will always have an incentive to have their own wages increased for
the same amount of effort. The wise employee will realize that they
are making a Faustian bargain. Their increased pay comes from
another laborer's unemployment.

Unions are a legal
monopoly on labor. A union will (at least in theory) take the
members dues and spend them in such a manner as to raise the members
wages enough higher to pay for the dues and then some. One of the
ways they can do this is by supporting minimum wage laws. Typically,
union members' wages are higher than minimum, sometimes by a factor of
two or three. They do this so that they can argue "Well, the minimum
wage is now fifty cents higher. Our members should get a raise of
fifty cents."

Busybodies support minimum wages out of a sense of fairness. Some
of them adhere to Marx's labor theory of value. This is the idea that
labor produces all value, and so all profits should go to laborers.
It's obviously balderdash, but it's convinced some people. There's
also shouldness: nobody should have to work for such a low
wage. This is obviously true, but the economist needs to add her own
should: nobody should lose their job because of a minimum
wage law. Equally obviously true.

Some busybodies total up the costs of living the way they want poor
people to live, and call the wages necessary to pay thoses costs "a
living wage". Without further thought, they support a minimum wage
law to increase the wages to a "living wage." This is a "should"
rather than an "is", just as in the previous paragraph. Just as they
"should" get a living wage, neither "should" they endure the
consequences of forcing employers to pay a living wage.

Follow the money

A minimum wage coerces an employer to pay more in wages than they
are receiving in labor. Clearly, if the employer was receiving that
value in labor, free market competition would force them to pay the
wage for that labor. The money to pay wages in excess of labor
received does not come from nowhere. It is a new cost imposed on a
business. In a free market economy, in time, that cost will be
reflected in the price of the good. Go read about prices, costs, and value if you think
otherwise.

If nothing else changes, then, prices will rise to cover the
increase to the minimum wage. The effect would be for everyone in the
economy, including those formerly employed at the minimum wage, those
currently employed at the minimum wage, and unemployed people, to pay
for the increase. While the now-minimum-wage employees are
better-off, the already-minimum-wage employees and unemployed people
are worse off. They are paying more for things, but not getting any
more themselves, even though they're equally or worse as well-off as
the now-minimum-wage employees. This effect is ignored or dismissed
by proponents of minimum wages.

You never have the case of nothing else changing, when you change
the price of something. Because goods and services produced by
minimum-wage employees are now more expensive, fewer of them will be
purchased. Fewer minimum-wage employees will be needed. This effect
is ignored or dismissed by proponents of minimum wages.

Labor is now more expensive. Whenever the cost of an input to
production changes, the manager of that production will re-evaluate
the production methods. It may be that a tool whose cost was formerly
prohibitive is now cost-effective. The McDonalds near me now has a
french-fry basket loader. They dump a big bag of fries into the
hopper, and it loads a specific amount into a fry basket. No doubt
the machine is cheaper to employ than the employee's time. This
effect is ignored or dismissed by proponents of minimum wages.

An employer may reevaluate his processes, and find that he can do
without the employee entirely. Perhaps a tool could be employed?
Perhaps the production process may be made more efficient? Perhaps he
can get other workers to work harder? This effect is ignored or
dismissed by proponents of minimum wages.

No matter how you cut it, somebody worse-off than the employee ends
up paying for the increased (above market) wages. That's a result of
economics, which is value-neutral. We could use our values to decide
that that's acceptable, fair, and moral. I don't think it is.
Minimum wage laws should be abolished solely because of that negative
effect.

Why didn't I notice this?

Right about now, somebody will say "there is no evidence that the
minimum wage law creates unemployment." They are fortunately quite
correct. The current minimum wage law doesn't lift wages much above
the market level. That means that they also don't create much
unemployment. You can point to the many people who have minimum wage
jobs, if you want. That won't help, because some of those people will
have minimum wage jobs anyway simply because the market price matches
the minimum.

Another reason you won't notice the unemployment caused by the
minimum wage is a very simple fact of human nature: it's hard to see
things that don't exist. We are biased by millenia of evolution to
notice things that exist, and disregard things that don't exist. It's
very easy to see minimum wage jobs. They're advertized in the
newspaper. People who are unemployed don't walk around with a sign
saying "Unemployed because the minimum wage went up." Everybody who
is alive today have ancestors who paid close attention to deadly
things that exist, and less attention to things they only imagine.

Also, when a minimum wage law destroys a job, it does so
stealthily. The loss of the job associated with an increase in the
minimum wage might happen many months after the wage increase.

Some people want the minimum wage to be much higher than it is now.
They would like to double the minimum
wage. The Haitian lace industry was destroyed (and the
livelihoods of thousands ruined) by application of a 1930's US minimum
wage law which doubled the wages of workers there. We could try that
experiment, but I wouldn't advise it. Any minimum wage law which
significantly increased the minimum wage would also significantly
increase unemployment. Thank your lucky stars that the existing
minimum wage laws have so little effect.

Update, 09Dec2003: David writes:

There is another issue with minimum wages not mentioned in your
entry, that of people assuming that banning something will make it go
away.

In Australia, we have minimum wage laws and worker protection laws
similar to those in western europe. What happens when you say that
people can't legally work for less than a certain amount is that large
numbers of people start working illegally for less than the minimum
wage.

Before finishing my degree, I've worked as a delivery driver,
dishwasher, cleaner, kitchenhand, counterhand, coffeemaker,
night-filler, farm labourer and research assistant. For all but two
of those jobs I worked cash in hand, for around one third to one half
of the minimum wage. Thousands of others do the same.

Aside from being paid below the minimum wage, the real problem for
workers in this sort of situation is that they are effectively
excluded from protection under most worker protection, harassment and
injury compensation laws. I've seen people injured while working who
had to pay nearly a weeks wages for an ambulance to hospital.

Workers at the lower end of the economy are often the most
vulnerable to exploitation, and these laws usually make things worse
for them.

He is, of course, quite correct. Making jobs illegal doesn't eliminate the jobs, but it does take them completely out of the purview of the legal system.